From once a ‘low profile’ China, and now to be transformed one that loves a good international bust up, it really comes with a price. Putting an Australian mining executive behind bars for 10 years, squeezing out Google, keeping EU at bay for the important dialogue and letting a mid-level official wag his finger at US President Obama at the Copenhagen Climate summit indeed a big doubt that China is engaging on constructive manner.
This is not withstanding that China has been stubbornly watering down sanctions on Iran and other African countries and it seems it is behaving very much like a ‘normal’ super- power, sharing world’s stage with other G-5. Having said that in the recent National People’s Congress, China Premier Wen Jiabao stressed that China should not punch above its weight and that the People’s Republic still needs stability if it is to become a society that offers a decent life to all of its citizens.
Nationalism in China is getting stronger by days. A foreign policy goal closely related to nationalism has been the desire to achieve territorial integrity and to restore to Chinese sovereignty. With China hosting its first-ever Olympics, the country has seen a surge in national pride. But Chinese are angry at what they see as the West trying to spoil their party. China’s nationalism today is shaped by its pride in its history as well as its century of humiliation at the hands of the West and Japan. China perceives itself as a victim of Western imperialism that began with the First Opium War and the British acquisition of Hong Kong in 1842 and lasted until the end of World War II in 1945, during which it suffered humiliating losses of sovereignty.
Beijing’s top priority today is to maintain peace at home while pursuing its development goals and a greater role in global affairs. Experts say while nationalism may be an effective tool for the Chinese regime to maintain control at home, it can harm its claim of “peaceful rise” globally. Nationalism is certainly an obstacle in China’s image as a responsible stakeholder.
Essentially, China needs a mature strategic dialogue, and comradeship should not guide policies. It should take a step back on its offensive charm, and back up with deeds and more initiative in fostering more effective cooperation.
Wednesday, April 28, 2010
Euro to Pound
Political situation in the UK looks to be much murkier than ever suggested, but reaction to pound could suggest otherwise.
A sea-changed in British politics looks likely on general election day on 6 May. But it is not to everyone’s liking. The apparently sharp increase in voting popularity of the UK Liberal Democratic Party – the perpetual ‘third force’ in British politics – has thrown up a specter for the bond markets. A ‘hung parliament’ where no one party wins enough seats to command power on its own, could be highly dangerous for sterling and the markets. That is at least the view being put around by the Opposition Conservatives, who see the Liberals as possibly thwarting their bid to overturn the Labour government that has been in power since 1997.
I believe this pessimism has gone too far. The higher the Liberals voting score, the more apparently ‘uncertain’ the election results, the higher sterling will be against the euro, I believe. But because of dramatic deterioration of the euro situation, I see pound as one of the stronger currencies in the next six months.
A ‘cliffhanger’ election results, that give no party an absolute majority might actually quite good for sterling. Coalition government can be effective as happened in the past in the UK.
A sea-changed in British politics looks likely on general election day on 6 May. But it is not to everyone’s liking. The apparently sharp increase in voting popularity of the UK Liberal Democratic Party – the perpetual ‘third force’ in British politics – has thrown up a specter for the bond markets. A ‘hung parliament’ where no one party wins enough seats to command power on its own, could be highly dangerous for sterling and the markets. That is at least the view being put around by the Opposition Conservatives, who see the Liberals as possibly thwarting their bid to overturn the Labour government that has been in power since 1997.
I believe this pessimism has gone too far. The higher the Liberals voting score, the more apparently ‘uncertain’ the election results, the higher sterling will be against the euro, I believe. But because of dramatic deterioration of the euro situation, I see pound as one of the stronger currencies in the next six months.
A ‘cliffhanger’ election results, that give no party an absolute majority might actually quite good for sterling. Coalition government can be effective as happened in the past in the UK.
Tuesday, April 27, 2010
Eyjafjallajokull
This word is not only difficult to pronounce but also difficult to remember. This mighty Icelandic volcano that has wrecked havoc with European air traffic will be something to be remembered for a long time, if what being predicted is correct.
There is most definitely has investment point. I learned yesterday from some hedge fund sources that scientists believe the real threat is from the relatively small Eyjafjallajokull volcano that it could trigger an eruption in its much larger neighbor, which is called Katla.
University of Iceland geologist Andy Hooper told Reuters that an eruption of Katla would make the ash cloud from Eyjafjallokull look trivial. I was told there is better than even chance that this would happen, if our planet continues to warm. At the end of the last ice age, the rate of eruption in Iceland was some 30 times higher than historic rates. This is because the reduction in the ice-load reduced the pressure in the mantle, leading to decompression melting there.
The melting ice due to changing climate, this will lead to additional magma generation, so we should expect more frequent and more voluminous eruptions in the future.
Greg Neale, who edits BBC History magazine saidt hat the Laki volcanic fissure in southern Iceland erupted from June 1783 to February 1784, spewing lava and poisonous gases that devastated the island’s crops and livestock and lead to the deaths of a quarter of the island’s population through famine. The sky turned dark across Europe and even cast a shadow over the United States that was recorded by Benjamin Franklin.
The Krakatoa eruption of 1883 in Indonesia, one of the most violent natural events in recorded history, threw up so much ash that crops were devastated as far away as the United States.
In short, volcanic eruptions can have significant effects on weather patterns for from two to four years which in turn have social and economic consequences. As such, we should keep a close eye on companies and commodities in the food complex, including raw grain and livestock prices, fertilizer producers and packaged food makers.
There is most definitely has investment point. I learned yesterday from some hedge fund sources that scientists believe the real threat is from the relatively small Eyjafjallajokull volcano that it could trigger an eruption in its much larger neighbor, which is called Katla.
University of Iceland geologist Andy Hooper told Reuters that an eruption of Katla would make the ash cloud from Eyjafjallokull look trivial. I was told there is better than even chance that this would happen, if our planet continues to warm. At the end of the last ice age, the rate of eruption in Iceland was some 30 times higher than historic rates. This is because the reduction in the ice-load reduced the pressure in the mantle, leading to decompression melting there.
The melting ice due to changing climate, this will lead to additional magma generation, so we should expect more frequent and more voluminous eruptions in the future.
Greg Neale, who edits BBC History magazine saidt hat the Laki volcanic fissure in southern Iceland erupted from June 1783 to February 1784, spewing lava and poisonous gases that devastated the island’s crops and livestock and lead to the deaths of a quarter of the island’s population through famine. The sky turned dark across Europe and even cast a shadow over the United States that was recorded by Benjamin Franklin.
The Krakatoa eruption of 1883 in Indonesia, one of the most violent natural events in recorded history, threw up so much ash that crops were devastated as far away as the United States.
In short, volcanic eruptions can have significant effects on weather patterns for from two to four years which in turn have social and economic consequences. As such, we should keep a close eye on companies and commodities in the food complex, including raw grain and livestock prices, fertilizer producers and packaged food makers.
Sunday, April 25, 2010
G20/IMF – Quick Update
The meeting over the weekend was quite about the RMB issue as predicted earlier. Of course, they understand the more and lauder they clamor about RMB revaluation, the stronger the likelihood of Chinese government to resist to ending its stable currency policy.
I expect more discussion to take place in next month’s US-China Strategic Economic Dialogue and the G20 leaders’ summit in June.
Because of this development and the unlikelihood that China will make any change to its currency policy short term plus EUR weakness and Greek uncertainties, I am expecting a less dovish Fed, which will underpin performance of the USD, and naturally for market to shift its strategy towards buying Asian currencies for two reasons. Firstly, Asian currencies as a proxy for the CNY and secondly more against the JPY and EUR as opposed to the USD. It remains to be seen if the EU can work with the IMF to help Greece to put its fiscal house back in order and to prevent the debt woes from spreading to other weak EU nations such as Portugal, and Spain.
What would be more critical to watch is the April 28 US FOMC meeting with recent statement that coming out from the US is getting us closer to US Fed hiking cycle as there are signs that US recovery is showing signs of broadening. The futures market is expected to start discounting the US hike cycle if the Fed drops key terms like ‘exceptionally low rates’ and ‘extended period’. Since the start of April, we are beginning to see speculators are reversing from net short to net long positions in USD/JPY in the CFTC market.
I expect more discussion to take place in next month’s US-China Strategic Economic Dialogue and the G20 leaders’ summit in June.
Because of this development and the unlikelihood that China will make any change to its currency policy short term plus EUR weakness and Greek uncertainties, I am expecting a less dovish Fed, which will underpin performance of the USD, and naturally for market to shift its strategy towards buying Asian currencies for two reasons. Firstly, Asian currencies as a proxy for the CNY and secondly more against the JPY and EUR as opposed to the USD. It remains to be seen if the EU can work with the IMF to help Greece to put its fiscal house back in order and to prevent the debt woes from spreading to other weak EU nations such as Portugal, and Spain.
What would be more critical to watch is the April 28 US FOMC meeting with recent statement that coming out from the US is getting us closer to US Fed hiking cycle as there are signs that US recovery is showing signs of broadening. The futures market is expected to start discounting the US hike cycle if the Fed drops key terms like ‘exceptionally low rates’ and ‘extended period’. Since the start of April, we are beginning to see speculators are reversing from net short to net long positions in USD/JPY in the CFTC market.
Thursday, April 22, 2010
Ecuador – Game Changer
They say commodity producers are price-taker and that has been the belief since then. Today, I am sharing you with a piece on Equador’s recent move to redefine this rule.
Ecuadorean President Rafael Correa is pressuring foreign oil investors to change from production-sharing agreements (PSA) to service contracts, else to face expropriation. Correa is looking to make the state’s authority over oil revenues, hence his political security and also perhaps at the expense of Ecuador’s long term economic development.
The left-leaning President Rafael, an economist by training has frequently expressed his disillusion with market reforms in Latin America and believes economic power should reside within the state. Shifting from PSA to servicing contracts, under which producers would have to pay a production fee and then get reimbursed for the cost of their investment. The state will end up getting more revenue for itself and the producers end up making less money overall since it can only make profits from remuneration fees – the amount per barrel that government is willing to pay companies for producing its oil. In another words, the foreign companies will incur risk of investing resources into a project with none of the potential rewards associated with high oil prices.
With his populist-driven handouts to the poor, Rafael will certainly strengthen his political base, which also showing stronger signs of coordinated opposition.
Equador’s economy depends heavily on oil, which accounts for roughly a quarter of GDP, 68% of total export earnings and 35% of fiscal revenues. The country is exporting about 470,000 barrels per day of oil this year – a heavy sour crude called Napo and a medium-heavy, medium sour crude called Oriente that is produced in the northeast of the country.
Many of these companies have reasons to take Rafael’s expropriation threats seriously. After the state took over US oil company Occidental Petroleum’s asset in 2006, claiming the firm’s contract had expired, Rafael further raised investor fears in late 2007 when he imposed a 99% windfall revenue tax on foreign energy firms to help make up for the state’s commercial bond debt obligations. And that led to a number of arbitration suits at the World Bank’s International Centre for Settlement of Investment Dispute. Equador has also expropriate two blocks belonging to Anglo-French oil firm Perenco over tax disputes.
It looks like most firms will have to settle reluctantly on the new contractual terms to remain in the country and maintain minimal production. But they will not have good incentive to invest further in exploration and deep drilling, particularly in the technically more complex fields in the Amazon.
Ecuadorean President Rafael Correa is pressuring foreign oil investors to change from production-sharing agreements (PSA) to service contracts, else to face expropriation. Correa is looking to make the state’s authority over oil revenues, hence his political security and also perhaps at the expense of Ecuador’s long term economic development.
The left-leaning President Rafael, an economist by training has frequently expressed his disillusion with market reforms in Latin America and believes economic power should reside within the state. Shifting from PSA to servicing contracts, under which producers would have to pay a production fee and then get reimbursed for the cost of their investment. The state will end up getting more revenue for itself and the producers end up making less money overall since it can only make profits from remuneration fees – the amount per barrel that government is willing to pay companies for producing its oil. In another words, the foreign companies will incur risk of investing resources into a project with none of the potential rewards associated with high oil prices.
With his populist-driven handouts to the poor, Rafael will certainly strengthen his political base, which also showing stronger signs of coordinated opposition.
Equador’s economy depends heavily on oil, which accounts for roughly a quarter of GDP, 68% of total export earnings and 35% of fiscal revenues. The country is exporting about 470,000 barrels per day of oil this year – a heavy sour crude called Napo and a medium-heavy, medium sour crude called Oriente that is produced in the northeast of the country.
Many of these companies have reasons to take Rafael’s expropriation threats seriously. After the state took over US oil company Occidental Petroleum’s asset in 2006, claiming the firm’s contract had expired, Rafael further raised investor fears in late 2007 when he imposed a 99% windfall revenue tax on foreign energy firms to help make up for the state’s commercial bond debt obligations. And that led to a number of arbitration suits at the World Bank’s International Centre for Settlement of Investment Dispute. Equador has also expropriate two blocks belonging to Anglo-French oil firm Perenco over tax disputes.
It looks like most firms will have to settle reluctantly on the new contractual terms to remain in the country and maintain minimal production. But they will not have good incentive to invest further in exploration and deep drilling, particularly in the technically more complex fields in the Amazon.
Wednesday, April 21, 2010
G20/IMF Meeting
The G20/IMF meeting starts today in Washington and that will last until 25 April 2010. The message will be very clear – those with heavy debt should allow their currencies to depreciate and those in surplus position should allow their currencies to appreciate.
To add to the pressure on China, a US Senate Banking sub-committee will be holding a hearing today to examine the impact of the RMB on US manufacturing. US Senate Banking Committee Chairman Chris Dodd has responded to reporters concerning his expectation of what President elect Obama will do concerning the China Yuan currency manipulation. Higher-ups in the international economy are quietly buying China currency while the American dollar is strong and waiting for U.S. pressure legislatively to be applied to the Obama administration. Huge potential profits await as the RMB gets released from captivity to rise to all-time highs.
We could expect to see Obama administration to seek greater international cooperation via the G20 forum to pressure China into action. So far, two of the BRIC economies – Brazil and India, have joined in calls for a stronger RMB. Russia on the other hand, holds a common position with China to promote the greater use of IMF SDR for international trade and investment transactions.
In the end, the reality remains that China will make the final decision. Last night, the Commerce Ministry declared China will not be subjected to international pressure to revalue its currency. China doesn’t subscribe to the view that its currency is primarily responsible for US’s trade deficit woes, especially now that it has reported a trade deficit. China is more concerned now with its efforts to address its domestic imbalances – cooling its property sector.
With Eurozone in crisis, it makes less sense for China to abandon its stable RMB policy, which it said was an emergency against the global financial crisis. The IMF warned recently that Greece could mark the starting point of a new phase in the global financial crisis.
A RMB revaluation remains a possible but improbable outcome at this week’s G20/IMF meeting. One just should take note of the larger issue for the foreign exchange market is the depreciation pressure on the EUR from the deterioration in Eurozone’s sovereign debt crisis. Following next is the April 28 FOMC meeting as well as the Senate hearings on Goldman Sachs a day before.
To add to the pressure on China, a US Senate Banking sub-committee will be holding a hearing today to examine the impact of the RMB on US manufacturing. US Senate Banking Committee Chairman Chris Dodd has responded to reporters concerning his expectation of what President elect Obama will do concerning the China Yuan currency manipulation. Higher-ups in the international economy are quietly buying China currency while the American dollar is strong and waiting for U.S. pressure legislatively to be applied to the Obama administration. Huge potential profits await as the RMB gets released from captivity to rise to all-time highs.
We could expect to see Obama administration to seek greater international cooperation via the G20 forum to pressure China into action. So far, two of the BRIC economies – Brazil and India, have joined in calls for a stronger RMB. Russia on the other hand, holds a common position with China to promote the greater use of IMF SDR for international trade and investment transactions.
In the end, the reality remains that China will make the final decision. Last night, the Commerce Ministry declared China will not be subjected to international pressure to revalue its currency. China doesn’t subscribe to the view that its currency is primarily responsible for US’s trade deficit woes, especially now that it has reported a trade deficit. China is more concerned now with its efforts to address its domestic imbalances – cooling its property sector.
With Eurozone in crisis, it makes less sense for China to abandon its stable RMB policy, which it said was an emergency against the global financial crisis. The IMF warned recently that Greece could mark the starting point of a new phase in the global financial crisis.
A RMB revaluation remains a possible but improbable outcome at this week’s G20/IMF meeting. One just should take note of the larger issue for the foreign exchange market is the depreciation pressure on the EUR from the deterioration in Eurozone’s sovereign debt crisis. Following next is the April 28 FOMC meeting as well as the Senate hearings on Goldman Sachs a day before.
Tuesday, April 20, 2010
A Standstill Thailand
Neither party wants to budge. The stake at hand is large and it is oversimplification to view the current saga as a conflict of interest between Red Shirts and current government. Royal family has been dragged into this mess as part of preparation of power transfer, likely to Crown Prince Vajiralongkorn and the coming promotion in army in October following the retirement of Army chief Anupong Paochinda. The violence and the ongoing presence of protestors on the streets of Bangkok will stress Thailand’s current institutional framework to its full limit.
I could not discount the possibility of a violent confrontation between Red Shirts and government security forces, as both parties are building up their arsenal. Army chief talked tough and the stage seems set for operations to remove the red-shirted protesters from the Rajprasong intersection as the military boosted its forces while the protesters were in defensive mode yesterday, erecting barricades and assembling home-made weapons for the next battle. There are as many as 10,000 troops in position now in the areas near Rajprasong, the main protest site. source said the protesters also have M67 grenades, M79 grenade launchers and rocket-propelled grenade launchers. They also seized many assault rifles from the military during the clashes with security forces on April 10 at Khok Wua intersection, the sources said. Of the 500 Israeli-made Tavor Tar-21 assault rifles seized by the protesters on that day, only 200 were returned to the Army, the source said, suggesting the protesters might use the weapons in the next clash.
Crown Prince Vajiralongkorn rumored to be closely associated with former Prime Minister Thaksin and people have privately asked whether he has the natural authority to unify the nation, especially given his partisanship towards the military.
One should not also forget that commander-in-chief Anupong is going to retire soon and it is not too hard to see round of jockeying for positions among those in line of command. Military support for Prime Minister Abhisit and its ruling coalition may not be as committed as before, and if current government is losing its monopoly of the use of the force, PM Abhisit’s days in power would seem to be numbered. The Red Shirt protestors know this and those with long patience will win.
Early elections remain a remote possibility and at this stage, it would a task for royal intervention, especially so when His Majesty the King who is still recuperating at Siriraj Hospital.
For now, portfolio managers are taking a neutral stance, at best with portfolio rebalancing with a domestic flight to safety but if situation turns violent given the current political divide, this could lead to a clear reversal of previous Thai equity market outperformance.
I could not discount the possibility of a violent confrontation between Red Shirts and government security forces, as both parties are building up their arsenal. Army chief talked tough and the stage seems set for operations to remove the red-shirted protesters from the Rajprasong intersection as the military boosted its forces while the protesters were in defensive mode yesterday, erecting barricades and assembling home-made weapons for the next battle. There are as many as 10,000 troops in position now in the areas near Rajprasong, the main protest site. source said the protesters also have M67 grenades, M79 grenade launchers and rocket-propelled grenade launchers. They also seized many assault rifles from the military during the clashes with security forces on April 10 at Khok Wua intersection, the sources said. Of the 500 Israeli-made Tavor Tar-21 assault rifles seized by the protesters on that day, only 200 were returned to the Army, the source said, suggesting the protesters might use the weapons in the next clash.
Crown Prince Vajiralongkorn rumored to be closely associated with former Prime Minister Thaksin and people have privately asked whether he has the natural authority to unify the nation, especially given his partisanship towards the military.
One should not also forget that commander-in-chief Anupong is going to retire soon and it is not too hard to see round of jockeying for positions among those in line of command. Military support for Prime Minister Abhisit and its ruling coalition may not be as committed as before, and if current government is losing its monopoly of the use of the force, PM Abhisit’s days in power would seem to be numbered. The Red Shirt protestors know this and those with long patience will win.
Early elections remain a remote possibility and at this stage, it would a task for royal intervention, especially so when His Majesty the King who is still recuperating at Siriraj Hospital.
For now, portfolio managers are taking a neutral stance, at best with portfolio rebalancing with a domestic flight to safety but if situation turns violent given the current political divide, this could lead to a clear reversal of previous Thai equity market outperformance.
The Recalcitrant China
Just as the US makes an impassioned push for tougher economic sanctions on Iran and Venezuela, China is reportedly increasingly building up relationships with these countries.
According to Reuters, the state-owned China National Petroleum Corp (CNPC) trading unit – shipped two cargoes totaling 600,000 barrels of gasoline to Iran in exchange for $55 million. Additionally, Unipec – the trading arm of China Petroleum & Chemical Corp (Sinopec) agreed to sell 250,000 of gasoline to Iran. It can be worse for its relationship with the US as Washington has spent months lobbying the international community to tighten sanctions on Iran, which is openly expanding its uranium enrichment capacity. In November 2009, Iran has announced its plans to build 10 uranium enrichment facilities and earlier this year, officials said construction would start at two sites by March 2011. In retaliation, US trade officials asserted that China undervalues its currency and earlier this year, the US followed through with a $400 billion arms sale to Taiwan and welcomed the Dalai Lama in spite of Chinese admonishments.
On the other hand, Venezuelan President Hugo Chavez, a staunch ally of Iranian President Mahmoud Ahmadinejad said that China has agreed to extend $20 billion in loans to his country. CNPC confirmed that it signed several agreements with Venezuela on a long-term credit-for-oil and a joint-venture to develop the country’s Junin 4 oil block. The Chinese state-owned oil company said it also signed a crude oil supply contract with Petroleos de Venezuela to guarantee the repayment of a 10-year loan. In return, Venezuela said it sends some 460,000 barrels a day of crude oil to China, although figures from Chinese government indicate China only imported an average of 132,000 barrels per day from Venezuela during the first couple of months of 2010.
Similarly, China has anted up to secure resources in Africa, even if that is meant dealing with some unsavory regimes. China’s friends in Africa included President Omar Bashir of Sudan, who is currently wanted by the International Criminal Court for war crimes, and Zimbabwe President Robert Mugabe, who has been accused of driving his country into economic ruin and starvation and is heavily sanctioned by the United States and European Union.
China is the largest supplier of arms to Sudan, which received $7 billion of Chinese defense exports between 2003 and 2007, according to the US Department of Defense.
Still, Beijing insists that its relationship with these countries is mutually beneficial. One thing that I am sure is that China is not as concerned as they used to be about irritating the US.
According to Reuters, the state-owned China National Petroleum Corp (CNPC) trading unit – shipped two cargoes totaling 600,000 barrels of gasoline to Iran in exchange for $55 million. Additionally, Unipec – the trading arm of China Petroleum & Chemical Corp (Sinopec) agreed to sell 250,000 of gasoline to Iran. It can be worse for its relationship with the US as Washington has spent months lobbying the international community to tighten sanctions on Iran, which is openly expanding its uranium enrichment capacity. In November 2009, Iran has announced its plans to build 10 uranium enrichment facilities and earlier this year, officials said construction would start at two sites by March 2011. In retaliation, US trade officials asserted that China undervalues its currency and earlier this year, the US followed through with a $400 billion arms sale to Taiwan and welcomed the Dalai Lama in spite of Chinese admonishments.
On the other hand, Venezuelan President Hugo Chavez, a staunch ally of Iranian President Mahmoud Ahmadinejad said that China has agreed to extend $20 billion in loans to his country. CNPC confirmed that it signed several agreements with Venezuela on a long-term credit-for-oil and a joint-venture to develop the country’s Junin 4 oil block. The Chinese state-owned oil company said it also signed a crude oil supply contract with Petroleos de Venezuela to guarantee the repayment of a 10-year loan. In return, Venezuela said it sends some 460,000 barrels a day of crude oil to China, although figures from Chinese government indicate China only imported an average of 132,000 barrels per day from Venezuela during the first couple of months of 2010.
Similarly, China has anted up to secure resources in Africa, even if that is meant dealing with some unsavory regimes. China’s friends in Africa included President Omar Bashir of Sudan, who is currently wanted by the International Criminal Court for war crimes, and Zimbabwe President Robert Mugabe, who has been accused of driving his country into economic ruin and starvation and is heavily sanctioned by the United States and European Union.
China is the largest supplier of arms to Sudan, which received $7 billion of Chinese defense exports between 2003 and 2007, according to the US Department of Defense.
Still, Beijing insists that its relationship with these countries is mutually beneficial. One thing that I am sure is that China is not as concerned as they used to be about irritating the US.
The ‘Lucky’ Australia
When the late Donald Horne called Australia the ‘Lucky Country’ in 1964, it was meant as an insult. But today, I guess the insult turns blessing simply that this country is sitting on a pile of valuable natural resources. She is the prime beneficiary of that new reality to global wealth.
Just after 2005 – the rise in those global commodity prices as well as the insatiable demand for raw materials from China and India that combined to fundamentally change Australia’s competitive position. It has since developed into a commodities powerhouse and is now the principal source of raw materials from the immense Chinese industrial engine. Last year, China’s automobile market leapfrogged the US market to take over the No. 1 spot in the world for the first time ever and it is growing at better than a 20% annual clip.
China needs particularly iron ore for its rapidly expanding steel industry and coal for its power stations. There is a ‘double-whammy’ effect on the Australian economy. While now there is no danger of inflation and the strength of the AUD up 22% on a trade-weighted basis last year, but the Reserve Bank of Australia has raised short-term interest rates five times in the last seven months, taking rates from 3% to 4.25%. Key fear is an asset bubble with home prices up 13% last year on an already inflated market and the stock market up 60% since its lows of last March. Australian consumers are spending like there is no tomorrow – a propensity they share with their cousins in the United States.
The situation is made more dangerous by the Australian budget deficit. At 4.7% of GDP for the fiscal year ended June, this is modest compared to the US deficit but it still represents an addition to the problem rather than solution.
With money pouring in from foreign investors, consumers are not saving adequately and the state also spending more than it takes in. Monetary tightening is not enough and the challenge remains with the ability to eliminate the budget deficit as quickly as possible.
Despite this, investors really cannot afford to avoid this economy especially it continues to increase its importance to the overall global economy.
Just after 2005 – the rise in those global commodity prices as well as the insatiable demand for raw materials from China and India that combined to fundamentally change Australia’s competitive position. It has since developed into a commodities powerhouse and is now the principal source of raw materials from the immense Chinese industrial engine. Last year, China’s automobile market leapfrogged the US market to take over the No. 1 spot in the world for the first time ever and it is growing at better than a 20% annual clip.
China needs particularly iron ore for its rapidly expanding steel industry and coal for its power stations. There is a ‘double-whammy’ effect on the Australian economy. While now there is no danger of inflation and the strength of the AUD up 22% on a trade-weighted basis last year, but the Reserve Bank of Australia has raised short-term interest rates five times in the last seven months, taking rates from 3% to 4.25%. Key fear is an asset bubble with home prices up 13% last year on an already inflated market and the stock market up 60% since its lows of last March. Australian consumers are spending like there is no tomorrow – a propensity they share with their cousins in the United States.
The situation is made more dangerous by the Australian budget deficit. At 4.7% of GDP for the fiscal year ended June, this is modest compared to the US deficit but it still represents an addition to the problem rather than solution.
With money pouring in from foreign investors, consumers are not saving adequately and the state also spending more than it takes in. Monetary tightening is not enough and the challenge remains with the ability to eliminate the budget deficit as quickly as possible.
Despite this, investors really cannot afford to avoid this economy especially it continues to increase its importance to the overall global economy.
How Ill is the UK?
There is one point that I think everyone agrees is the depth of the fiscal hole at a ratio of 4:1 and today’s fiscal deficits exceed those of any previous period in peacetime. Huge questions remain over the timing and content of such action.
Question is whether or when a further fall in sterling could turn into a rout. Such a loss of confidence might then undermine inflationary expectations and raise long-term interest rates. The result could b both a renewed recession and an explosive path for public debt. At the same time, a further fall in sterling seems desirable, if not inevitable. Weak demand in the euro-zone, the UK’s biggest trading partner, only makes such a fall even more necessary. This is going to be a very tricky policy performance.
What is the right economic medicine for the UK? Sterling is set for a white-knuckle ride in the run-up to the general election, as the fiscal face-off between the Conservatives and Labour keeps the UK's hefty deficit in the headlines, and investors fret about the consequences of a hung parliament.
The British economy is mired in its longest recession on record. Investment by UK businesses on new buildings and equipment plunged by a record amount over the past year. The sharp overall and ongoing decline in business investment could threaten to have significant long-term damaging repercussions for the economy's potential output.
The latest unemployment rate for the UK is 7.8%. For England it stands at 7.8%, for Scotland 7.6% and for Northern Ireland 6.3%.
Poor consumer confidence index figures in March suggest that people are losing faith in recovery after January and February rises. The 2,000 adults interviewed by GfK NOP also took a more negative view of the overall economic situation over next 12 months. This measure came in at zero, compared with +4 in February. The index also indicated that consumers are becoming more cautious about of their own personal financial situation, with this measure falling to -15 from -13 in February. With the election only weeks away the government will be disappointed that consumer confidence has slipped this month.
The upside for consumer spending will be limited for some time to come as households continue to face very challenging conditions, notably including high unemployment, low earnings growth, elevated debt levels, January's VAT hike and the prospect of further fiscal tightening ahead that will very likely include more tax hikes.
Question is whether or when a further fall in sterling could turn into a rout. Such a loss of confidence might then undermine inflationary expectations and raise long-term interest rates. The result could b both a renewed recession and an explosive path for public debt. At the same time, a further fall in sterling seems desirable, if not inevitable. Weak demand in the euro-zone, the UK’s biggest trading partner, only makes such a fall even more necessary. This is going to be a very tricky policy performance.
What is the right economic medicine for the UK? Sterling is set for a white-knuckle ride in the run-up to the general election, as the fiscal face-off between the Conservatives and Labour keeps the UK's hefty deficit in the headlines, and investors fret about the consequences of a hung parliament.
The British economy is mired in its longest recession on record. Investment by UK businesses on new buildings and equipment plunged by a record amount over the past year. The sharp overall and ongoing decline in business investment could threaten to have significant long-term damaging repercussions for the economy's potential output.
The latest unemployment rate for the UK is 7.8%. For England it stands at 7.8%, for Scotland 7.6% and for Northern Ireland 6.3%.
Poor consumer confidence index figures in March suggest that people are losing faith in recovery after January and February rises. The 2,000 adults interviewed by GfK NOP also took a more negative view of the overall economic situation over next 12 months. This measure came in at zero, compared with +4 in February. The index also indicated that consumers are becoming more cautious about of their own personal financial situation, with this measure falling to -15 from -13 in February. With the election only weeks away the government will be disappointed that consumer confidence has slipped this month.
The upside for consumer spending will be limited for some time to come as households continue to face very challenging conditions, notably including high unemployment, low earnings growth, elevated debt levels, January's VAT hike and the prospect of further fiscal tightening ahead that will very likely include more tax hikes.
Monday, April 19, 2010
Iceland’s Volcanic
We have heard and talk a lot in the wake of Iceland’s misbehaving volcano. These volcanic antics have disrupted air travel worldwide and it must be a bitter pill to swallow for all of us. Demonstrating the unpredictability of volcanic eruptions, Britain’s National Air Traffic Service said on Monday afternoon that airspace in Scotland and parts of northern England would reopen on Tuesday morning, and sounded optimistic that the rest of Britain would be cleared for flying later in the day; but later switched to a more cautious tone as a new ash cloud began spreading. Earlier, Norway, Sweden and Finland had allowed a few mainly domestic flights to operate.
It will have material impact for European carriers, especially for premium/business travel as time critical business trips will not get rebooked and business travelers will look at other options, like video conference etc. It will also have an impact on the near term earnings of the Asian/Australasian airlines as well, but the impacts are likely to be relatively smaller.
The mainland Chinese airlines have minimal exposure to Europe with most of their business largely coming from domestic revenues, and most of the airlines have a single digit exposure. Singapore Airline has a larger exposure to Europe, historically about 20-25% of their revenues coming from Europe route. Load-factors for Europe have also been picking up recently with passenger load factors averaging +80% since October last year. Taiwanese Airlines, EVA and China Air said they cancelled some of their flights to Europe and estimate the number of passengers to be influenced to be around 1,000 people per day. Europe contributes 17% for China Air and 14% for EVA Air, including both cargo and passenger revenue. Cathay Pacific has about 18% exposure to Europe route but the company has not been seeing too much growth on the Europe route in recent months. Korean Airlines seems to be negatively impacted with Europe route accounts for about 20% of total revenue. The impact on the cargo business seems to be more negative, but will likely to pick up significantly due to delays once current volcano issue dampens.
More worrying is the impact on Thai Airways because European routes account for 38% of RPK. Despite the recent political turmoil in Thailand, passenger load factors of these routes had been holding up well – high 70s. THAI has cancelled 22 flights per day into Europe, but is offering additional services to three airports in southern Europe – Rome, Madrid and Athens as an alternative for standard passengers. Management says the cancellations are affecting 6,000 passengers per day and currently 15,000 passengers are stranded.
It will have material impact for European carriers, especially for premium/business travel as time critical business trips will not get rebooked and business travelers will look at other options, like video conference etc. It will also have an impact on the near term earnings of the Asian/Australasian airlines as well, but the impacts are likely to be relatively smaller.
The mainland Chinese airlines have minimal exposure to Europe with most of their business largely coming from domestic revenues, and most of the airlines have a single digit exposure. Singapore Airline has a larger exposure to Europe, historically about 20-25% of their revenues coming from Europe route. Load-factors for Europe have also been picking up recently with passenger load factors averaging +80% since October last year. Taiwanese Airlines, EVA and China Air said they cancelled some of their flights to Europe and estimate the number of passengers to be influenced to be around 1,000 people per day. Europe contributes 17% for China Air and 14% for EVA Air, including both cargo and passenger revenue. Cathay Pacific has about 18% exposure to Europe route but the company has not been seeing too much growth on the Europe route in recent months. Korean Airlines seems to be negatively impacted with Europe route accounts for about 20% of total revenue. The impact on the cargo business seems to be more negative, but will likely to pick up significantly due to delays once current volcano issue dampens.
More worrying is the impact on Thai Airways because European routes account for 38% of RPK. Despite the recent political turmoil in Thailand, passenger load factors of these routes had been holding up well – high 70s. THAI has cancelled 22 flights per day into Europe, but is offering additional services to three airports in southern Europe – Rome, Madrid and Athens as an alternative for standard passengers. Management says the cancellations are affecting 6,000 passengers per day and currently 15,000 passengers are stranded.
Goldman Sachs
The news hit the financial market like a carefully targeted bomb when the US Securities and Exchange Commission announced it had filed a fraud action against Goldman Sachs, which relates to the investment bank’s sub-prime mortgage business. Depending on how rough the SEC wants to play it, the case has the potential to shut down the cartel known as Wall Street.
For more than a year in 2006-07, while the market was falling apart, Goldman was issuing sub-prime mortgage collaterized-debt obligations (CDOs) to investors even as it was shorting the hell out of the sub-prime mortgage market. Goldman was doing this both directly and through credit-default swaps (CDS), most of which were written by American International Group. When the market collapsed, Goldman made a huge trading profit, including about $13 billion provided by US taxpayers as part of the AIG bailout.
In its initial form, the SEC suit is limited and in any case includes only civil charges of fraud. In one particular subprime mortgage CDO deal called ‘ABACUS’ done in early 2007, Goldman allegedly colluded with the hedge fund operator Paulson & Co, which was seeking to short the sub-prime mortgage market, hence making the company founder John A. Paulson, a multi-billionaire in what has become known as the greatest trade ever. Goldman told investors that the residential MBS for ABACUS had been chosen by a neutral ‘portfolio selection agent’, but in reality Goldman allowed Paulson to sort among the RMBS – choosing, of course, the most likely to go wrong. In return, Paulson paid Goldman a fee of $15 million, while he reaped $15 billion on his greatest trade. Paulson’s role in the deal was nowhere disclosed to investors. By January 2008, less than a year after the issue, 99% of the RMBS in the ABACUS portfolio had been downgraded by the rating agencies. Goldman then sold CDOs in ABACUS to investors, including ABN AMRO Bank, IKB Deutsche Industriebank AG, who lost more than $1 billion.
Given this situation, it seems the financial-reform bill introduced by US Senator Christopher Dodd will likely to pass both houses without all that much alteration. And if that is the case, it should immediately raise our suspicions. After all, the US financial services business has a very effective lobby. Now, the real risk to the economic recovery is that regulators could over-regulate.
For more than a year in 2006-07, while the market was falling apart, Goldman was issuing sub-prime mortgage collaterized-debt obligations (CDOs) to investors even as it was shorting the hell out of the sub-prime mortgage market. Goldman was doing this both directly and through credit-default swaps (CDS), most of which were written by American International Group. When the market collapsed, Goldman made a huge trading profit, including about $13 billion provided by US taxpayers as part of the AIG bailout.
In its initial form, the SEC suit is limited and in any case includes only civil charges of fraud. In one particular subprime mortgage CDO deal called ‘ABACUS’ done in early 2007, Goldman allegedly colluded with the hedge fund operator Paulson & Co, which was seeking to short the sub-prime mortgage market, hence making the company founder John A. Paulson, a multi-billionaire in what has become known as the greatest trade ever. Goldman told investors that the residential MBS for ABACUS had been chosen by a neutral ‘portfolio selection agent’, but in reality Goldman allowed Paulson to sort among the RMBS – choosing, of course, the most likely to go wrong. In return, Paulson paid Goldman a fee of $15 million, while he reaped $15 billion on his greatest trade. Paulson’s role in the deal was nowhere disclosed to investors. By January 2008, less than a year after the issue, 99% of the RMBS in the ABACUS portfolio had been downgraded by the rating agencies. Goldman then sold CDOs in ABACUS to investors, including ABN AMRO Bank, IKB Deutsche Industriebank AG, who lost more than $1 billion.
Given this situation, it seems the financial-reform bill introduced by US Senator Christopher Dodd will likely to pass both houses without all that much alteration. And if that is the case, it should immediately raise our suspicions. After all, the US financial services business has a very effective lobby. Now, the real risk to the economic recovery is that regulators could over-regulate.
Ready VIX
Volatility waned and financial, industrial and retail stocks waned. Could this be the sign that investors are becoming too complacent and I do expect to see a correction in weeks to come. To be sure, the volatility is really dropping. Since mid-February, just three of the 37 trading days have featured a change in the Dow Jones Industrial Average of 100 points or more. Compared that to the 13 of 100 points day from mid-January to mid-February.
The last time CBOE Volatility Index (VIX) broke under a multiyear line of bottoms was mid-2003 following the 2000-2002 bear market. The VIX then proceeded to fall for four more years and all the while the S&P rose. Now, the VIX has broken a multiyear bottoms line again, but the VIX now is only at the place where it began the last four-year bull cycle and has much, much farther to fall to equal its lows of the last cycle, even after the spike higher on Friday.
The last time CBOE Volatility Index (VIX) broke under a multiyear line of bottoms was mid-2003 following the 2000-2002 bear market. The VIX then proceeded to fall for four more years and all the while the S&P rose. Now, the VIX has broken a multiyear bottoms line again, but the VIX now is only at the place where it began the last four-year bull cycle and has much, much farther to fall to equal its lows of the last cycle, even after the spike higher on Friday.
Sunday, April 18, 2010
Vietnam
After a long silence on Vietnam since three years ago, I am turning positive again on it. Couple of my friends just came back from tour of duty and their ground feeling is that Vietnam remains a land of opportunity with rising middle class from a large population base of 85 million – the 15th most populous country in the world. The rising affluence of the middle class is apparent judging by the strong take up rate for Berjaya Land and SP Setia launches and the sprouting of more luxury brands such as Gucci, LV, Bally and more vehicles on the road.
There are now five 100% owned foreign banks namely HSBC, ANZ, Standard Chartered, Hong Leong and Shinhan Bank, Korea and credit card growth appears to be very fast developing service with Vietnam being predominantly a cash economy. But banks need applicants to deposit 120% of the maximum limit in saving accounts, while housing loans are increasing with tenures up to 10 years and loan amount of 70% of total purchase price.
Property market activity continued to remain robust. Rapid middle class, urbanization and improvement in transportation system in HCMC with metro lines, more highways and sky trains will boost property prices further. There seems to be strong preference for well-planned, mid-end township developments, judging by Phu My Hung in HCMC and Ciputra in Hanoi. According to a property developer, there will be an increase in residential launches in 2Q10 and likely to be skewed towards high rise developments. The affordable housing markets – US$1,000 to US$1,600 sq meter and below, have the most potential. District 2 and 7 are the more popular township residential areas. There are still very tight restrictions on foreign ownership of property. Only very high ranking foreigners are allowed to own property and this is limited to condominiums.
More investments are flowing in. There is increasing interest from the Spanish and Korean governments while China investments are more concentrated in Hanoi. Japan is more focused in the industrial sector.
Consumer spending, which constitutes 65% of GDP is the anchor of the economy. The number of credit card users has hit 20% versus 7% when Parkson first opened. Levis brand during peak periods can rake in US$70,000 per month.
Dong is likely to hold steadily with mild risk of more devaluation this year. The State Bank of Vietnam has devalued the Dong by a total of 9% since end-2009, which has helped the trade deficit. Since then, the government has implemented a series of fiscal and monetary tightening measures that were effective in stabilizing the currency. Reserve requirements were raised from 5% to 11% and the State Bank of Vietnam increased the policy base rate to 14%.
There are now five 100% owned foreign banks namely HSBC, ANZ, Standard Chartered, Hong Leong and Shinhan Bank, Korea and credit card growth appears to be very fast developing service with Vietnam being predominantly a cash economy. But banks need applicants to deposit 120% of the maximum limit in saving accounts, while housing loans are increasing with tenures up to 10 years and loan amount of 70% of total purchase price.
Property market activity continued to remain robust. Rapid middle class, urbanization and improvement in transportation system in HCMC with metro lines, more highways and sky trains will boost property prices further. There seems to be strong preference for well-planned, mid-end township developments, judging by Phu My Hung in HCMC and Ciputra in Hanoi. According to a property developer, there will be an increase in residential launches in 2Q10 and likely to be skewed towards high rise developments. The affordable housing markets – US$1,000 to US$1,600 sq meter and below, have the most potential. District 2 and 7 are the more popular township residential areas. There are still very tight restrictions on foreign ownership of property. Only very high ranking foreigners are allowed to own property and this is limited to condominiums.
More investments are flowing in. There is increasing interest from the Spanish and Korean governments while China investments are more concentrated in Hanoi. Japan is more focused in the industrial sector.
Consumer spending, which constitutes 65% of GDP is the anchor of the economy. The number of credit card users has hit 20% versus 7% when Parkson first opened. Levis brand during peak periods can rake in US$70,000 per month.
Dong is likely to hold steadily with mild risk of more devaluation this year. The State Bank of Vietnam has devalued the Dong by a total of 9% since end-2009, which has helped the trade deficit. Since then, the government has implemented a series of fiscal and monetary tightening measures that were effective in stabilizing the currency. Reserve requirements were raised from 5% to 11% and the State Bank of Vietnam increased the policy base rate to 14%.
Quick Update on Market
Usually, I don’t read into short-term signals, but happening over the last couple of weeks worth a look. Sell down last Friday, triggered by the US Securities Exchange Commission, who sued Goldman Sachs for defrauding investors via a product-related to subprime mortgages, has made markets turned defensive. Pay close attention to equity futures which are already looking for Dow to break below the psychological 11,000 level this week.
If US banks become the dominant theme this week, look for USD and JPY to become safe haven currencies, and stronger profit-taking in emerging Asian currencies and commodities currencies is anticipated. The Asian currencies are vulnerable to risk aversion. Owing the strong appreciation from last week’s surprise ‘twin-tightening’ in its exchange rate policy, the SGD will be most vulnerable for short-covering. Likewise, USD/IDR, which has not been able to break sustainably below 9,000 and is now most vulnerable to upside risks, if the Jakarta Composite Index starts retreating from its all-time high. And in the case of Thailand, the finance ministry and the central bank have warned about more THB weakness as the army and protestors moved closer towards a showdown in Thailand. Under the circumstances, I expect China is likely to get some respite from recent US-led international pressures toi revalue its RMB.
If US banks become the dominant theme this week, look for USD and JPY to become safe haven currencies, and stronger profit-taking in emerging Asian currencies and commodities currencies is anticipated. The Asian currencies are vulnerable to risk aversion. Owing the strong appreciation from last week’s surprise ‘twin-tightening’ in its exchange rate policy, the SGD will be most vulnerable for short-covering. Likewise, USD/IDR, which has not been able to break sustainably below 9,000 and is now most vulnerable to upside risks, if the Jakarta Composite Index starts retreating from its all-time high. And in the case of Thailand, the finance ministry and the central bank have warned about more THB weakness as the army and protestors moved closer towards a showdown in Thailand. Under the circumstances, I expect China is likely to get some respite from recent US-led international pressures toi revalue its RMB.
Urban Migration in China
This is going to be the greatest story in China for next 10 years. We are talking about a group that is 1.6 times the entire US population, moving from China’s countryside to its cities in next decade. Some analysts are estimating some 500 million Chinese citizens are expected to have moved into China’s cities as part of the greatest urban migration ever recorded and there are couple of long-term institutional investors that I have good relations are rushing to lock up some valuable land parcels before 2020. Wang Mengkui, head of the cabinet's think-tank, told the Financial Times that the country's urban population would rise to around 800 million by 2020, up from an official 502 million at the end of last year.
A population shift of this magnitude cannot help, but to be a major catalyst for increasing real estate values, especially in such top-tier cities as Beijing, Shanghai and Guangdong, where I am partly based now. It will also significantly shift the market dynamics of second-tier municipalities such as Chongqing, where literally millions of people are pouring in from countryside. China’s urbanisation rate of 39 per cent now is equivalent only to that of the UK in the 1850s, that of the US in 1911 and that of Japan in 1950.
China just announced its 1Q growth of 11.9% - the country’s fastest expansion in nearly three years and a rate that was faster that what analysts were expecting. As a matter of fact, central planners are raising reserve requirements for lenders, are tightening up on permits and construction licenses and are even taking steps to halt illegal development. In some parts of China, local developers will often construct entire buildings and never pull a permit.
As the property prices in Beijing and Shanghai increase in expense, many companies, investors, and developers are shifting their focus to the second-and-third tier cities that have yet to experience the urbanization rush of their much-larger first-tier counterparts. I cannot deny that the speculative excesses that exist in very high-end residential real estate in the primary cities.
Is there a real estate bubble? No there isn’t because urban migration will create a near infinite future demand for residential and commercial real estate. Does China under consume? Yes but urban migration will raise consumption rates.
This latter claim was highlighted in an article in the the South China Morning Post, which claims that“President Hu Jintao’s pledge to spur urbanisation and domestic demand next year has been seen as an attempt to tackle the growing problem of industrial overcapacity.
A population shift of this magnitude cannot help, but to be a major catalyst for increasing real estate values, especially in such top-tier cities as Beijing, Shanghai and Guangdong, where I am partly based now. It will also significantly shift the market dynamics of second-tier municipalities such as Chongqing, where literally millions of people are pouring in from countryside. China’s urbanisation rate of 39 per cent now is equivalent only to that of the UK in the 1850s, that of the US in 1911 and that of Japan in 1950.
China just announced its 1Q growth of 11.9% - the country’s fastest expansion in nearly three years and a rate that was faster that what analysts were expecting. As a matter of fact, central planners are raising reserve requirements for lenders, are tightening up on permits and construction licenses and are even taking steps to halt illegal development. In some parts of China, local developers will often construct entire buildings and never pull a permit.
As the property prices in Beijing and Shanghai increase in expense, many companies, investors, and developers are shifting their focus to the second-and-third tier cities that have yet to experience the urbanization rush of their much-larger first-tier counterparts. I cannot deny that the speculative excesses that exist in very high-end residential real estate in the primary cities.
Is there a real estate bubble? No there isn’t because urban migration will create a near infinite future demand for residential and commercial real estate. Does China under consume? Yes but urban migration will raise consumption rates.
This latter claim was highlighted in an article in the the South China Morning Post, which claims that“President Hu Jintao’s pledge to spur urbanisation and domestic demand next year has been seen as an attempt to tackle the growing problem of industrial overcapacity.
Sovereign Debt Crisis is Underway
I have written couple of notes on Greece in the past couple of weeks, but I have yet to show you that this problem actually can be a much bigger part of the growing mound of looming landmines in the global economy that has been damaged by the worst economic crisis in more than 80 years.
Last November, Dubai sent tremors through financial markets by announcing it would be ‘restructuring’ its debt. The government later offered its bondholders just 60 cents on the dollar for their investment. Now, Greece’s shaky finances represent another threat to the lifespan of the euro, the second most widely held currency in the world. And it stands on wobbly footing as the second domino in an unraveling global sovereign debt crisis. The other potential candidates include Portugal, Italy, Ireland, Spain and even the UK, Japan and the US.
That is a lineup of suspects that if under the gun of global investor scrutiny for their respective burgeoning debt problems. Even though one argues that the euro zone and the IMF as they stepped up last week and provided details of aggressive financial aid as a lifeline to Greece, the hope was that Greece’s default threat to be finally been put to bed. My sense, the Greece problem is far from over. Those initial favourable responses to the aid plan are well expected. It has 11.6 billion euros of government debt to refinance over the next month – and another 20 billion euros by the end of the year. Funding from its fellow euro zone countries at best will only allow Greece to roll-over that debt.
The potential debt burden from those next in-line could become even more vulnerable – a recipe for a political and economic disaster in Europe and a potential break-up of the euro. In short, I continue to expect the sovereign debt crisis to continue to build and be cautious of a quick downturn in global risk appetite, especially when the US stock market climbing, almost daily, to new post-crisis highs.
Headlines are usually about what happened already. I fully recognized the extraordinarily optimistic sentiment that now blankets the financial world.
Last November, Dubai sent tremors through financial markets by announcing it would be ‘restructuring’ its debt. The government later offered its bondholders just 60 cents on the dollar for their investment. Now, Greece’s shaky finances represent another threat to the lifespan of the euro, the second most widely held currency in the world. And it stands on wobbly footing as the second domino in an unraveling global sovereign debt crisis. The other potential candidates include Portugal, Italy, Ireland, Spain and even the UK, Japan and the US.
That is a lineup of suspects that if under the gun of global investor scrutiny for their respective burgeoning debt problems. Even though one argues that the euro zone and the IMF as they stepped up last week and provided details of aggressive financial aid as a lifeline to Greece, the hope was that Greece’s default threat to be finally been put to bed. My sense, the Greece problem is far from over. Those initial favourable responses to the aid plan are well expected. It has 11.6 billion euros of government debt to refinance over the next month – and another 20 billion euros by the end of the year. Funding from its fellow euro zone countries at best will only allow Greece to roll-over that debt.
The potential debt burden from those next in-line could become even more vulnerable – a recipe for a political and economic disaster in Europe and a potential break-up of the euro. In short, I continue to expect the sovereign debt crisis to continue to build and be cautious of a quick downturn in global risk appetite, especially when the US stock market climbing, almost daily, to new post-crisis highs.
Headlines are usually about what happened already. I fully recognized the extraordinarily optimistic sentiment that now blankets the financial world.
Thursday, April 15, 2010
Bull Killed by Overlooked Problems
The US stock market has staged one of its most powerful rallies in history that followed the March o9, 2009 market low. It soared another 5% during the first quarter of this year – its best first quarter in a dozen years. You cannot bury your head in the sand and ignore what’s happening. We cannot fail to acknowledge the cheap money from the government bailout and not a well-rounded economy recovery as the most likely drivers behind the torrid run-up in the US share prices.
I have received quite a significant response over the last two months arguing this bull market is too good to be true. My guess is that the stock market a year from now will be a lot lower that it is now. I suspect that when we are able to look back on the recent ‘bull-market’ in a larger or longer context, it will show up as a large bear market bounce, fueled by a huge government stimulus and ultra-low interest rates that make keeping cash in US Treasuries or money market funds very unpalatable.
The market crash that ended a year ago was triggered by excessive debt, financial manipulation, deceit and lack of true moral hazard. We are now have even more debt, unabated financial manipulation, collaborative deceit between the Fed and Wall Street, and confidence bordering on certainty that if the too-big-to-fail guys fail again, the government will not dare to not bail them out again.
Given that the ‘recession’ did not clean up the problems that caused it, I don’t see any way that we can avoid another drop, deeper and harder, to correct the problems that were not allowed to correct on the previous iteration. I don’t know when the next collapse will begin, but now we have a target-rich environment that fertilizes the land.
But be warned, soothsayers can be accurate or be believed, but not both.
As former US Vice President Dick Cheney famously said, ‘deficits don’t matter’… and that is perfectly true – up until now as most developed economies are now running deficits, it is increasingly to look like the debt will have to be monetized, which in due course can only lead to inflation.
I have received quite a significant response over the last two months arguing this bull market is too good to be true. My guess is that the stock market a year from now will be a lot lower that it is now. I suspect that when we are able to look back on the recent ‘bull-market’ in a larger or longer context, it will show up as a large bear market bounce, fueled by a huge government stimulus and ultra-low interest rates that make keeping cash in US Treasuries or money market funds very unpalatable.
The market crash that ended a year ago was triggered by excessive debt, financial manipulation, deceit and lack of true moral hazard. We are now have even more debt, unabated financial manipulation, collaborative deceit between the Fed and Wall Street, and confidence bordering on certainty that if the too-big-to-fail guys fail again, the government will not dare to not bail them out again.
Given that the ‘recession’ did not clean up the problems that caused it, I don’t see any way that we can avoid another drop, deeper and harder, to correct the problems that were not allowed to correct on the previous iteration. I don’t know when the next collapse will begin, but now we have a target-rich environment that fertilizes the land.
But be warned, soothsayers can be accurate or be believed, but not both.
As former US Vice President Dick Cheney famously said, ‘deficits don’t matter’… and that is perfectly true – up until now as most developed economies are now running deficits, it is increasingly to look like the debt will have to be monetized, which in due course can only lead to inflation.
Bond Bear Market?
US 10-year Treasury bonds briefly pierced the 4% for the first time over a year. Bond investors were panic and their concerns are understandable. The threat of rising interest rates has been hanging over fixed-income markets ever since the Fed began printing money at hyper-speed during the financial crisis.
Question now is the end near for the bond market? I am seeing clearer signs that long-term interest rates will be heading higher eventually given the massive fiscal deficit and US’ reliance on foreign lenders. The ultimate day of reckoning for the bond market is coming, but it is likely to be over time, not overnight.
But it makes prudent sense to begin taking steps to help protect your portfolio against rising interest rates when they occur. What this really boils down to is timing and it is important to understand where and how to make the right moves with your fixed-income holdings. Right now, economic fundamentals still appear too weak for inflation to take hold and the Fed intends to keep interest rates low for an ‘extended period’ as they have repeatedly broadcast. The broad money M2 is still contracting at a record rate, in spite of the Fed’s runaway printing press. The trouble is the Fed’s liquidity is not getting circulated back into the real economy as outstanding bank credit contracts at close to a 5% annual rate.
In essence, the shorter the maturities of your portfolio, the lower the yield but shorter maturities are also less sensitive to price changes as interest rates fluctuate. Bu adding medium-term maturities and emerging market bonds, we may be able to kick-up cash-flow even more.
Question now is the end near for the bond market? I am seeing clearer signs that long-term interest rates will be heading higher eventually given the massive fiscal deficit and US’ reliance on foreign lenders. The ultimate day of reckoning for the bond market is coming, but it is likely to be over time, not overnight.
But it makes prudent sense to begin taking steps to help protect your portfolio against rising interest rates when they occur. What this really boils down to is timing and it is important to understand where and how to make the right moves with your fixed-income holdings. Right now, economic fundamentals still appear too weak for inflation to take hold and the Fed intends to keep interest rates low for an ‘extended period’ as they have repeatedly broadcast. The broad money M2 is still contracting at a record rate, in spite of the Fed’s runaway printing press. The trouble is the Fed’s liquidity is not getting circulated back into the real economy as outstanding bank credit contracts at close to a 5% annual rate.
In essence, the shorter the maturities of your portfolio, the lower the yield but shorter maturities are also less sensitive to price changes as interest rates fluctuate. Bu adding medium-term maturities and emerging market bonds, we may be able to kick-up cash-flow even more.
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